HKEx chief defends himself from criticism after saying mainland China market safe
Stock exchange chief Charles Li, who has faced criticism this week for his comment that mainland markets were safe even as investors lost millions, said he was talking about their regulatory infrastructure, not price levels.
“When I said the China market was safe, I was referring to its market structure, I did not mean it was safe to invest in the market,” the chief executive of Hong Kong Exchanges and Clearing told the South China Morning Post on Thursday.
Li came in for a lot of criticism from investors and media commentators in Hong Kong and on the mainland after describing the mainland market as “the most transparent” and “safe” during a visit to Shanghai in late June. Many investors interpreted those comments as Li saying it was safe to invest in the mainland market, which was falling off a cliff at the time.
Regulators can see right through the system to quickly identify wrongdoing and take immediate action
Li said that when he described the mainland market as “safe” and “transparent”, he was referring to the fact that all mainland investors had to open accounts and put their shares with central clearing and not their brokers.
“There’s no doubt that China’s market structure is more transparent because regulators can see everything that happens on the exchanges,” he said. “Such a system has allowed the mainland regulators to be fully aware of who is trading behind all the stocks. With the single identification number, regulators can see right through the system to quickly identify wrongdoing and take immediate action.
“China is also the ‘safest’ market in the world today from a customer asset perspective. The system is structured in such a way that investors’ assets are left with a central custodian, making them completely off-limits to dealers who may otherwise use the assets to leverage or monetise them.
“This is what I meant when I said the Chinese stock market is very transparent and safe. I never meant to say that it was safe to invest in the market.”
Li also said there were downsides to such a transparent and safe market structure.
“On the flip side, this ‘see through’ system only applies to on-exchange activities, and so has failed to reach the off-exchange market,” he said. “Internet lender-fuelled leverage, which some speculate contributed greatly to this round of boom-and-bust in China, is relatively new and perhaps caught the regulators off guard. Several investigations have begun in this area.”
Li said Beijing’s efforts to rescue the mainland markets from precipitous falls were no different in their intention from what the United States and Europe did in the 2008 global financial crisis or what Hong Kong government’s intervention in the market during the 1998 Asian financial crisis.
“Beijing wanted to rescue the markets at an early stage to prevent any knock-on effect, even though they knew there might be side effects or some negative impact,” he said.
He said HKEx was proceeding with preparations for the Shenzhen-Hong Kong stock connect scheme despite the recent market volatility.
“We are still doing what we should do to prepare for the tie-up between the Shenzhen stock exchange and HKEx,” he said, adding that it was up to Beijing to decide when the new cross-border trading scheme would begin.”
